About that 68-Cent Big Mac Price Increase

Bloggers went wild yesterday over a new “study” from Kansas college student Arnobio Morelix, who claims that McDonald’s could double every employee’s salary and benefits and only increase the price of a Big Mac by 68 cents.

It’s tough to evaluate the validity of this claim, since it was published in The Huffington Post without any link to a hard copy report. But based just on the published interview with HuffPo, it’s clear Morelix’s prediction isn’t worth the paper it’s written on.

Here’s Morelix’s methodology, as described to HuffPo:

Morelix looked at McDonald’s 2012 annual report and discovered that only 17.1 percent of the fast-food giant’s revenue goes toward salaries and benefits. … Thus, if McDonald’s executives wanted to double the salaries of all of its employees and keep profits and other expenses the same, it would need to increase prices by just 17 cents per dollar, according to Morelix.

That 17 percent figure must have been a head-scratcher for anyone involved in running a quick service restaurant. The typical fast food restaurant fitting McDonald’s profile spends 30 to 35 percent of its income paying labor costs–double the figure Morelix cites. What gives?

By contrast, the small business owners that actually operate McDonald’s locations are spending about a third of their income on employees. Using Morelix’s own methodology, this means prices would actually increase by 32 cents on the dollar if labor costs doubled, or an extra $1.28 for your Big Mac. Big difference. (Morelix’s estimate also ignores the fact that price increases reduce restaurant sales–requiring even higher prices on the remaining customers to maintain the assumed profit line).

Restaurants generally avoid big price hikes that decrease their sales. A doubling in labor costs will decrease employment for less-skilled job seekers, who will find their jobs replaced by touchscreen and voice recognition technology as business operators find automation a feasible alternative. As Morelix crams for his exams this fall, he might consider reading up on restaurant margins before releasing his next “report.”